BEIJING, Feb 20 (Reuters) - China's foreign direct investment inflows fell at their fastest rate in more than three years in January, highlighting the challenges it faces competing for funds with cheaper rivals in a sluggish global growth environment.

China Commerce Ministry data on Wednesday showed the world's second-biggest economy drew in $9.3 billion of foreign direct investment (FDI) in January, down 7.3 percent on a year ago.

The fall was the steepest in year-to-date inflows since a 9.9 percent drop in November 2009, and it was the worst January performance in four years.

January FDI was down from December's $11.7 billion, with inflows from key Asian economies and the United States down in the latest period, reflecting what analysts say are foreign perceptions of a decline in China's near term growth prospects.

Zhang Zhiwei, chief China economist at Nomura in Hong Kong, said the continuing fall in FDI - the longest consecutive run since the global financial crisis - was indicative of the rising competitive challenges facing the world's biggest manufacturer of exports.

"We expect more multinational companies will increase investment in cheaper countries, such as Vietnam and Indonesia," Zhang told Reuters.

FDI is an important gauge of the external economy to which China's vast factory sector is oriented, though it is a small contributor to China's overall capital inflows compared with exports, which were worth about $2 trillion in 2012.

The FDI data followed stronger-than-expected trade figures in January, which pointed to a solid recovery in domestic and external demand after China's economic growth in 2012 eased to a 13-year low - albeit at a 7.8 percent clip that is the envy of the world's major economies.

China attracted a total of $111.7 billion in FDI in 2012, just shy of 2011's record $116 billion and marking the first annual fall in three years.

The Commerce Ministry data showed investment inflows from the European Union rose 81.8 percent in January from year ago to $820 million, while investment by U.S. firms fell 20.0 percent during the same period to $270 million.

FDI from 10 top Asian economies, including Hong Kong, Japan and Singapore, fell 9.0 percent year on year in January, to $7.8 billion the ministry said.

FDI TO REBOUND MODESTLY

Beijing has said it wants to bring in $120 billion worth of FDI each year between 2012 and 2015.

"We expect that later in the year FDI will rebound modestly, as global business confidence improves and on delayed impact of the Chinese growth recovery towards the end of 2012," Dariusz Kowalczyk, senior economist and strategist for non-Japan Asia at Credit Agricole CIB, wrote in a note to clients.

Despite the continuing decline in FDI flows, January's inflow puts China roughly on track to deliver its full year target, assuming the absolute level of investment remains steady through the rest of the year as investors gain confidence in the country's near term recovery and longer term prospects.

Commerce Ministry spokesman, Shen Danyang, told a news conference it was too early to infer anything about the path of FDI in 2013 and the broader implication for the economy.

"We can see that the FDI figure in January continued to drop from a year ago, but we cannot judge the full-year FDI trend simply from one single month of data," Shen said.

"As I have said before, the FDI figure is unlikely to see a sharp drop this year, but will remain at a relatively steady level."

A report earlier on Wednesday from ratings agency, Moody's, said China's economy was on track to deliver growth of 7.5-8.5 percent in 2013, with relatively easy monetary conditions and targeted fiscal spending likely to sustain the recovery.

"The favorable growth outlook is supported by policy easing and credit extension, particularly by the non-banking sectors, and should continue in 2014," Moody's said.

China joined the World Trade Organisation in November 2001 and FDI inflows have soared since. OECD data shows China rivals the United States as the world's top FDI destination.

Wednesday's data showed Service sector inflows last month were $4.0 billion, down 9.8 percent on a year ago.